The Financial Crimes Enforcement Network (FinCEN) had earlier issued an announcement reminding of the due date for filing the 2017 FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the notorious “FBAR”). The 2017 FBAR relates to foreign financial accounts held at any time during the calendar year 2017.
In line with the change in the law for the FBAR due date wrought by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”), the Announcement reiterated that the FBAR filing deadline would follow the Federal income tax due date guidance. This date is generally April 15, but when the Federal income tax due date falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day.
The Act changing the FBAR due date also provided for an automatic six-month extension to file the form. This means that the extension for the 2017 FBAR is until October 15, 2018, a date that is speedily approaching. FinCEN’s Announcement reminded filers that specific requests for the extension are not required. You do not have to do anything in order to obtain this extension; you need only file the FBAR no later than October 15.
FBARs must be filed electronically on FinCEN’s Bank Secrecy Act (BSA) E-Filing System website.
Virtual Currency and FBAR
With the rise in popularity of virtual currency, a number of clients have asked what to do with such currency and their FBAR reporting duties. As an aside, the terms “virtual” and “digital” currency are often mistakenly used interchangeably. Virtual currencies are a type of digital currency. In other words, all virtual currencies are digital, but not all digital currencies are virtual. You can learn more about the distinction here.
Let’s look at what we have to date on the topic of virtual currency and FBAR from the IRS and FinCEN:
The only guidance provided by the IRS with respect to virtual currency was issued in 2014 with Notice 2014-21. (My tax blog post is here). In that Notice IRS proclaimed that virtual currency is to be treated as “property” and not “currency” for US federal tax purposes. Even though virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — it did not have legal tender status in any jurisdiction until April 1, 2017 when Japan declared Bitcoin as a legal tender or payment method.
The IRS Notice issued in 2014 relied on the fact that virtual currency was not regarded as legal tender in any jurisdiction. That has now changed with last year’s Japanese pronouncement. Whether the IRS may view Bitcoin differently now (especially when used in transactions with Japan where it is legal tender) is an open question and the possible different treatment indeed raises other tax issues (e.g., foreign currency gains and losses). Evidently, the tax law cannot keep up with technological changes, putting taxpayers at great risk for simply not knowing how transactions should be treated for US tax and reporting purposes.
In 2014, FinCen advised a Forbes tax editor that FBAR reporting was not required at the time for digital (or virtual) currency accounts held overseas, but that it may consider requiring such accounts to be reported in the future.
Recent Responses from IRS and FinCEN
I have not seen any additional guidance in this area and recently wrote to both the IRS FBAR hotline FBARQUESTIONS@irs.gov and FinCEN for an update.
FinCEN replied on September 11th – “FinCEN has not provided guidance on this matter at this time.”
The reply from the IRS dated September 12, came from a Senior BSA Tax Law Specialist in the BSA Compliance Department: “There has been no change from the advice FinCEN and IRS gave during the webinar in 2014: Bitcoins and other virtual currencies in foreign accounts are not reported on FBARs at this time but that FinCEN may require such reporting at a later date.”
Unsettled – What to do?
The concern of tax professionals is that virtual currencies are on the IRS hotlist right now. Last year the IRS successfully required Coinbase to disclose the account records of over 14,000 customers whose Bitcoin transactions exceeded $20,000 per annum and stated that the information will be used to identify and obtain evidence on individuals using Bitcoin to either launder money or conceal income. (more on the Coinbase matter here and here). I understand that in an attempt to track digital currency transactions, the IRS has entered into a license agreement to use software to identify the owners of digital wallets. These developments clearly indicate that the area is heating up and definitely should be handled with care.
My readers are probably well aware that talk is cheap, even when the speaker is the IRS. Only certain types of IRS guidance may be relied upon by taxpayers. My blog post here details this important issue and readers will be reminded that if the information is not published in the official Internal Revenue Bulletin then it is not legal authority and cannot be relied upon. So, while the statements made to me by FinCEN and the IRS may offer some level of comfort, they cannot be used to sustain a taxpayer’s position.
Taking an approach on the more conservative end of the spectrum, one can consider treating virtual currency for FBAR purposes in the same manner as other assets such as gold or hard currency. These assets are not reportable on the FBAR Form 114 when the assets are held directly by the individual (e.g., when the individual carries around gold coins or hard currency). However, they become reportable when they are maintained in a foreign financial account. Under this type of approach, when an individual carries around a printed or gold-colored Bitcoin, for example, he would not report that Bitcoin for FBAR purposes. However, once the individual places the value of his Bitcoin in a virtual wallet hosted overseas, the scene changes and the overseas Bitcoin wallet becomes more akin to a foreign financial account. As an aside, paper wallets and gold-colored coins are indeed one way to store Bitcoin but generally in order to actually use it for transactions, one needs an online “wallet”. It may help to look at it this way – if there is an account relationship between you and an overseas custodian that is holding the virtual currency for you, reporting the account on FBAR makes safer, sounder sense, especially in light of the high penalties that can be assessed for non-filing.
Posted September 19, 2018
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